What are candlestick charts?
Candlestick charts originate from 1700 in Japan, where someone named Homma discovered that while there existed a link between demand and supply, there was also something else to be considered: the traders’ emotions.
A candlestick chart is a chart made of several candles, which traders utilize to understand price action. Price action allows traders to understand all financial markets’ hints to trends and reversals.
Each candle represents a time frame selected by the trader. One of the most used time-frames is the daily time one.
Traders use these charts to understand price activity, which includes:
- Open price.
This is the first price traded when a new candle is formed. If the price rises the candle turns green (or blue, depending on the chart), and if it decreases the candle turns red.
- Close price.
This is the last price traded during the candlestick period. If the close price is lower than the open price, then the candle will turn red. If it is higher than the open price, the candle will turn green (depending on the chart settings).
- High price.
During the candlestick period, the highest price traded will be indicated by the upper wick/shadow. If the highest price was the open or close price, then there will be no upper shadow.
- Low price.
During this period, the lowest price traded will be indicated by the price at the bottom, or by lower wick/shadow. If there is no shadow, then the lowest price is the same as the open or closed one.
Candlestick charts include other elements, like:
- Price direction
The price direction is indicated by the candlestick color. If the close price is higher than the open price of the candle, then the price is moving upwards, the candle will be green, and the candle would be positioned higher in the chart. If the candle is red and is positioned lower, then the close price is below the open price.
- Price range
The length between the top of the upper shadow and the bottom of the lower shadow indicates the price range tracked during the candlestick time frame. The price range is calculated by subtracting the low price from the high price.
Individual candlesticks can provide a lot of insight into market sentiment. Once you understand what each candle is indicating, you can begin searching for the right trading possibilities for you, since they can be used as entries into or exit signals out the market.
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